Baazeem Trading (TADAWUL:4051) has had a rough three months with its share price down 15%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Baazeem Trading's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How To Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Baazeem Trading is:
14% = ر.س27m ÷ ر.س201m (Based on the trailing twelve months to March 2021).
The 'return' is the yearly profit. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.14 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Baazeem Trading's Earnings Growth And 14% ROE
On the face of it, Baazeem Trading's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 5.2%, is definitely interesting. However, Baazeem Trading's five year net income decline rate was 8.1%. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the decline in earnings could also be the result of this.
That being said, we compared Baazeem Trading's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 8.3% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Baazeem Trading's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Baazeem Trading Making Efficient Use Of Its Profits?
With a high three-year median payout ratio of 70% (implying that 30% of the profits are retained), most of Baazeem Trading's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 2 risks we have identified for Baazeem Trading visit our risks dashboard for free.
Additionally, Baazeem Trading has paid dividends over a period of four years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.
Overall, we have mixed feelings about Baazeem Trading. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Baazeem Trading and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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